Wheel Street Journal #8 - Investment Value Metrics

The Battle Continues: Which is the most relevant value metric?

There are many ways to analyze investment real estate opportunities. Four of the most common value metrics are:

Cap rate = Net operating income / Price
Price per unit = Price / # of Units
Gross income multiplier (GIM) = Price / Gross income
Price per square foot = Price / Building square footage

So which one works best? Well, it depends. Cap rates represent the unleveraged rate of return, but can often get manipulated by deflating expenses. The GIM is nice and clean because it ignores expense and focuses purely on gross income. Price per unit and price per square foot focus on the key physical attributes of the building, while disregarding income and expenses altogether. Price per unit can get tricky when unit sizes varies (1 bedrooms vs 2 bedrooms...). Price per square foot can also be skewed if one building takes into account common area square footage and another does not.

As you can see, anchoring investment decisions based on a single metric is complicated. Check out our video this week to see how our top brokers interpret these key investment metrics (and see which broker likes which metric best!).

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News & Politics

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• wheelhouse
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